Tax Claims Vs. Unsecured Debt

by Christopher Raines

Tax claims get priority over unsecured debt in bankruptcy cases.

Taxes and unsecured debt are two distinct types of financial obligations. Governments impose taxes under the authority of law, while debt obligations often arise from commercial or consumer activities. The differing nature of taxes and unsecured debt affect how these obligations are enforced and handled in bankruptcy. In terms of collection, tax claims receive preferential treatment over unsecured debt.

Definitions

A tax is an involuntary obligation. The federal government and state and local governments impose tax obligations upon individuals, organizations or their property to pay for public services and infrastructure. Governments assess income, property and sales taxes. Debt typically refers to an obligation to pay for products or services received, or to repay a loan. An unsecured debt is not backed by collateral. Credit cards and bills from hospitals, doctors, lawyers and other providers of goods and sellers constitute the most common forms of unsecured debt.

Collection Procedures

Governments may collect unpaid taxes by seizing vehicles and other personal property; filing a claim, or lien, against land and buildings; and garnishing a portion of salary or wages. Tax collectors can use these methods without filing a lawsuit. For an unsecured debt, the creditor must file a lawsuit and obtain a judgment that the debtor owes the debt. Once the creditor receives judgment, the debtor can request that certain property be exempt from being used to pay the judgment. The creditor can use the debtor's non-exempt property to pay on the judgment.

Discharge in Bankruptcy

Bankruptcy frees debtors from certain obligations. Debtors must still pay property taxes incurred within one year of a bankruptcy filing, income taxes, and excise taxes, since these are not discharged by bankruptcy. Bankruptcy extinguishes most unsecured debt, unless the debtor intentionally lied on an application or other writing to obtain the loan, services, products or credit. Other non-discharged unsecured debt includes student loans, child support and alimony.

Priorities

In this case, "priority" refers to the order of paying unsecured claims in bankruptcy -- including tax claims not secured by a lien -- when a debtor lacks enough property to pay all unsecured claims. Tax claims get paid before credit card companies, service providers and other holders of unsecured debt.

About the Author

Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.